How China’s Small Businesses Can Expand and Exchange Outside of Law

In my previous article, we saw one of the consequences of human population regulation, drawing parallel between present-day China and 18th century Austria. European Jews faced and adapted to another consequence: A wide range of other regulations and expecting less than equality before the courts at the time lead to trading among themselves. When they wanted to settle disputes, they turned to religious authorities, rather than the courts. Traces of these arrangements survive to this day in the still very much Jewish diamond trade.

Exchange is still based on complex rules that go back 1,000 years. Contracts are still based on a code of honor that traces its roots to the Old Testament, the Talmud, and the teachings of the Maimonides. Contracts of millions of dollars are concluded by only a handshake and the Hebrew statement Mazal ubracha, (“Luck and Blessing”) rather than a written contract approved by lawyers.

How does this evidence bear on China? Neither Chinese law, nor Chinese courts are today reliable institutions. There is no great commercial legal tradition in China. And such tradition can neither be imposed, nor created quickly. So how will the Chinese expand their family businesses?

Whereas in Europe, large families succeeded in pooling together their resources and expanding family businesses backed by legal institutions – and that’s how Western European corporations developed before having access to developed financial markets – this arrangement cannot be done in China for the simple reason that the one-child policy kept families small. There are no brothers, sisters, and for the coming generations no first cousins.

How then will the small family businesses that reach their limits and would like to grow, expand? Since it will take long before China will have developed sophisticated financial markets (which do need solid legal backing), the expansion will have to take place through voluntary associations between “trusted” families – or, perhaps, the only institution which had some layers of accountability, and the ability to enforce “arrangements” – the Communist Party, the “big family.” (And let us not forget that urban citizens, more likely linked to the Partym have been those deciding to have one kid).

Thus, a variation of what happened among Jews within the larger European community, or happened elsewhere in the world among tribes which, for one reason or another were discriminated against (such as the Chinese in Thailand), and where the countries had no reliable legal framework is now taking place in China, adapted to the political institutions the country had.

What shape and form these voluntary organizations will eventually take, I do not know. But people are ingenious in the ways they can adapt – even if the adaptation has long-term neurotic consequences, which are not anticipated, and whose origin will be long forgotten when they surface.

Reuven Brenner holds the Repap Chair at McGill’s Desautels Faculty of Management, serves on the Board of the McGill Pension Fund and is member of its investment committee.

He worked with Bank of America, Knowledge Universe, EEN, Bell Canada, Repap Enterprises and with investors in Canada, Mexico, the US and Europe. He has been involved in the private equity markets as partner in Match Strategic Partners, has been investing in start-ups across Canada, as part of an “angel group,” and also created his own start-up, “e-mortal.com.” He has also been serving on boards of companies and institutions.

He was expert witness in cases covering anti-trust, bankruptcy and financial matters. In other spheres, Quebec’s government asked him in 1995 to be member of a commission whose mandate was to examine all aspects of Quebec’s possible separation. He was also asked to testify before US Congressional Commissions and Canada’s Senate’s Banking and Finance Committee, and worked with Poland’s central bank during the recent crisis.

His recent books are A World of Chance (2008) and Force of Finance (2002). His regular columns appeared in Forbes, The Wall Street Journal, Asia Times and other financial press around of the world. Forbes’ journalists put two of his earlier books in their all time recommended list, and Forbes Global dedicated a cover story, titled “Leapfrogging,” to his works and endeavors. Brenner also received the Killam Award (1992), the Royal Society elected him as “Fellow”(1999), and he received a Fulbright Fellowship Grant (1976).

Brenner was born in Rumania and immigrated to Israel in 1962. He served in the Israeli army between 1966-69, during the Six-Day War, and again during the 1973 Yom Kippur War. The Fulbright fellowship brought him in 1977 to Chicago, after completing his PhD at the Hebrew University and working at the Bank of Israel, where he received the First Prize from Israeli banks (for work with Saul Bronfeld, designing indexed securities). He lives in Canada since 1980. He is fluent in English, French, Hebrew and Hungarian.

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